Just Resharing! Best Read of the Day!
Who likes taking losses?
No one does.
They all know how to cut their losses.
What?....
You gotta be kidding me.
How can they be the BEST if they take LOSSES?
I'll tell you why.
This table shows how much you need to gain to break-even from certain loss percentages.
Imagine that... as the loss gets bigger, it gets harder to break even. Once you're stuck in a deep rut, it's hard to get back into trading..
Even if there are many other future opportunities, because you got slaughtered in one play, with all your capital in it, you miss out on finding stocks that have strong potential.
In other words, you let one stock kill you, that's GAME OVER. That's why the best traders never let this happen to them.
Let me tell you a story of two traders:
Boy Kapit and Boy Sniper
Let me tell you a story of two traders:
Boy Kapit and Boy Sniper
(Take note: in this context we are discussing about traders--people who buy & sell actively hoping to gain profit in the short-to-medium term. Long term investors have a different strategy and context. We'll talk about that in a different article)
Trader 1: Boy Kapit
He has no strategy. He hasn't defined his own rules when to buy and sell. He usually goes by gut feel and rumors from his idols and friends.
He profits for a while. Turning his 500k into 1 million because of the BULL run.
Until the day he encounters this stock called CALATA
Let's see what happens.
Boy Kapit buys $CAL at 22.00, because his friend told him that this will reach the stars, 100 pesos!
Woah! So he gets tempted and puts all his savings in this stock thinking that it will be his chance of a lifetime.
Now let's see his what happens.
at 20 pesos his loss is 9% -- "babawi pa yan"
at 18 pesos his loss is 18% -- "kaya pa to, sabi nila titirahin daw ni Mr Zanjo to eh"
at 14 pesos his loss becomes 36% -- "aaahh bahala na long term nalang"
As the pain goes higher, most of us will just resort to leaving the position--to eliminate the pain.
The $CAL party happened in 2012, now let's see where it is now.
After years of hoping the stock was never able to recover.
While Boy Kapit may justify his decision by saying "ok lang paper loss lang naman eh, aakyat rin yan"
Ask yourself this
How do you know?
And if yes, How long will it take?
While there are many certainties where the stock does bounce up over time, there are some that NEVER go back.
Here's an example:
If you're a 35 year old with a family, what are you gonna do if you placed your life savings of 1 Million PESOS at the highs.
Having that mindset na "babawi rin yan"
After 10 years of waiting your PHP 1m is now just worth 100k
Can you afford to wait another 10 years just for you to avoid taking a loss? Just to say that "Hey I didn't lose money"
As much as it's nice to hope and pray that prices will recover, the harsh reality is that sometimes it never comes back.
This behavior--the BOY KAPIT mentality--is often the reason why many people never experience the benefits of the Stock Market.
They let this one instance ruin them.
Now let's look at this other trader.
TRADER 2: Boy Sniper
Boy Sniper has his own strategy and system defined, he has defined his rules when to BUY and SELL. His strategy only wins 40% of the time, but he ends up profitable in the stock market every year.
Say what? How can you be profitable by only winning 40% of the time?
Read on, we'll show you.
As his form of protection, he has a rule of selling positions when it shows an 8% LOSS or more. Meaning if his loss gets to 8% or higher he must GET OUT of the STOCK no EXCEPTIONS.
In the same $CAL situation here is what happened to Boy Sniper, upon buying $CAL at 22.00
So what did Boy Sniper gain by setting an 8% stop loss rule?
He saved himself from another 80% drop.
He freed his capital so that he can find another opportunity
He LIVES ANOTHER DAY.
Because of his protection rule, he knows to himself that he will never be wiped out in ONE TRADE.
Let's say Boy Sniper is only correct 4 ouf of 10 times with his trading strategy. But on the 4 times that he is correct he gains a minimum of 20% upside, how would that equate?
On 10 trades he will still net around 32% GAIN
Even if he loses 6 times, his downside is always capped at 8% per trade.
He knows that 4 out of 10 times he can gain 20% per trade. That's why it is OK for Boy Sniper to take these losses because he knows that he will just wait it out and identify a new trade when it comes.
Because of his discipline on following his rules, he always gets another chance to live another day, and find a better opportunity.
This is how professional traders think. They are well aware that capital protection is the first priority.
You cannot fight back if you have no bullets. In this game you must use your bullets wisely. Remember, you can easily buy back any time if you mistakenly sell a strong position. On the other hand you cannot sell easily, if you mistakenly HOLD a losing position for too long.
He saved himself from another 80% drop.
He freed his capital so that he can find another opportunity
He LIVES ANOTHER DAY.
Because of his protection rule, he knows to himself that he will never be wiped out in ONE TRADE.
Let's say Boy Sniper is only correct 4 ouf of 10 times with his trading strategy. But on the 4 times that he is correct he gains a minimum of 20% upside, how would that equate?
On 10 trades he will still net around 32% GAIN
Even if he loses 6 times, his downside is always capped at 8% per trade.
He knows that 4 out of 10 times he can gain 20% per trade. That's why it is OK for Boy Sniper to take these losses because he knows that he will just wait it out and identify a new trade when it comes.
Because of his discipline on following his rules, he always gets another chance to live another day, and find a better opportunity.
This is how professional traders think. They are well aware that capital protection is the first priority.
You cannot fight back if you have no bullets. In this game you must use your bullets wisely. Remember, you can easily buy back any time if you mistakenly sell a strong position. On the other hand you cannot sell easily, if you mistakenly HOLD a losing position for too long.
Now you choose which trader you want to be:
The clueless Boy Kapit who relies on tips & rumors for buying decisions, and luck & hope to save him from his mistakes?
Or
The disciplined Boy Sniper who has formulated his own strategy that gives him only 4 out of 10 correct trades but still manages to make money over the long period of time?The purpose of this article is to highlight the importance of Risk Management.
We're not saying that you go ahead and cut all of your losses. Assess whether the stock is worth the fight, or is it better to live another day. We want people to be aware of one of the main principles that successful traders follow.
God speed everyone.
We're not saying that you go ahead and cut all of your losses. Assess whether the stock is worth the fight, or is it better to live another day. We want people to be aware of one of the main principles that successful traders follow.
God speed everyone.